Skip to main content

Still no $%& inflation

The Bank of Canada has a thing for inflation.  For years the BoC has had a 1.5% to 2.5% inflation target.  A necessary lubricant to a growing economy, and yet prices are just not cooperating.  Inflation has been rising recently to near the lower target of 1.5%, but every time we get close inflation disappears again.


(Source:  Statistics Canada)


The CPI is a measure (warts and all) of the consumer costs, another is the Industrial Production and Raw Material which also shows limited movement (at least until early 2004)


The problem that virtually all that price increase was caused by energy costs that have soared following the "continuing disagreements" in the Ukraine.  Bottom line oil prices rose from around $90/bbl to $106/bbl -- a 17% increase in 4 months.  So really no help there because everything else is not doing much at all.

What is the BoC to do?  Well the foreign exchange markets have already decided that the era of interest rate tightening is already over, and in fact in full reverse-- just look at the mortgage rates on offer from Canadian banks -- bottom line the BoC's interest rate normalization project is dead in the water, back to the rest of the world where zero interest rate policy (with all its risks) is back on.

For foreign investors the news is good -- after all Canada is still a resource rich country, with a reasonable debt position (when compared to the other guys) and where a relatively homogenous population ensures that no armed insurrection will occur (unless you count the occasional snow ball fight).  Overall, the BoC is back at square one -- the same place it was 18 months ago, except that for all its effort the CAD has dropped by about 10% (maybe that was the objective...).

The policy tools available to central banks are narrower than they were 10 years ago.  Changing demographics is a key issue here; an ageing population may not react the same way as a young one when rates change -- they are rate givers (net savings) and not rate takers (young indebted families).

The challenges for Canada are as follows:


  1. Despite near full employment workers don't have much bargaining power for wage increases
  2. Inflation, despite massive growth in money supply (insert definition here), is not occurring
  3. Canada is far more open than it was 20 years ago, the tools the BoC has grown up with are no longer effective -- a corporation that sells its goods in US dollars will match its borrowing requirements to reduce the currency risk impact using natural hedges.  This corporation is not impacted by the BoC
  4. Canadian banks are bigger today and better capitalized -- there BoC has only moral suasion (which failed recently when Canadian banks reduced prime mortgage rates despite the wishes of the BoC)
  5. New tools are required and maybe new measures of inflation too -- although StatCan is a specialist in terminating data series
Fundamentally, OECD economies are finding that population shift are impacting economic management tools -- if you think its bad here, imagine China -- where the one child policy implemented in 1979 is now "coming home to roost" with a dramatic drop in the growth of the labour pool.  Try managing that problem when Chinese companies will have to fight for new employees... What is being seen in a rather massive way in China is seen in a milder format here in the OECD.  Economists have yet to figure out what economic tools can be used to influence the economy.

Finally, on inflation and the various index we look at:  In America the price of a Big Mac has risen by 5.8% per annum over the past 10 years -- between 2004 and 2004.  Now that's not scientific.  A house in Montreal in in 2005 is now 50% more expensive than it was then -- that too is part of inflation -- unless you never moved, which statistically is wrong since 40% of Canadian move every 5 years.



Comments

Post a Comment

Popular posts from this blog

Ok so I lied...a little (revised)

When we began looking at farming in 2013/14 as something we both wanted to do as a "second career" we invested time and money to understand what sector of farming was profitable.  A few things emerged, First, high-quality, source-proven, organic farm products consistently have much higher profit margins.  Secondly, transformation accounted for nearly 80% of total profits, and production and distribution accounted for 20% of profits: Farmers and retailers have low profit margins and the middle bits make all the money. A profitable farm operation needs to be involved in the transformation of its produce.  The low-hanging fruits: cheese and butter.  Milk, generates a profit margin of 5% to 8%, depending on milk quality.  Transformed into cheese and butter, and the profit margin rises to 40% (Taking into account all costs).  Second:  20% of a steer carcass is ground beef quality.  The price is low, because (a) a high percentage of the carcass, and (b) ground beef requires process
Post a Comment
Read more

21st century milk parlour

When we first looked at building our farm in 2018, we made a few money-saving decisions, the most important is that we purchased our milk herd from a retiring farmer and we also purchased his milking parlour equipment.  It was the right decision at the time.  The equipment dates from around 2004/05 and was perfectly serviceable, our installers replaced some tubing but otherwise, the milking parlour was in good shape.  It is a mature technology. Now, we are building a brand new milk parlour because our milking cows are moving from the old farm to the new farm.  So we are looking at brand new equipment this time because, after 20 years of daily service, the old cattle parlour's systems need to be replaced.  Fear not it will not be destroyed instead good chunks will end up on Facebook's marketplace and be sold to other farmers for spare parts or expansion of their current systems. All our cattle are chipped, nothing unusual there, we have sensors throughout the farm, and our milki
Post a Comment
Read more

So we sold surplus electricity one time last summer...(Update)

I guess that we will be buying an additional tank for our methane after all.   Over the past few months, we've had several electricity utilities/distributors which operate in our region come to the farm to "inspect our power plant facilities, to ensure they conform to their requirements".  This is entirely my fault.  Last summer we were accumulating too much methane for our tankage capacity, and so instead of selling the excess gas, that would have cost us some money, we (and I mean me) decided to produce excess electricity and sell it to the grid.  Because of all the rules and regulations, we had to specify our overall capacity and timing for the sale of electricity (our capacity is almost 200 Kw) which is a lot but more importantly, it's available 24/7, because it's gas powered.  It should be noted that the two generators are large because we burn methane and smaller generators are difficult to adapt to burn unconventional gas, plus they are advanced and can &qu
Post a Comment
Read more